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Fading Faith in the Fed

It was just over two months ago, on Sept. 18, that the Federal Reserve made Wall Street so happy with a 50-basis point reduction in the Fed Funds rate.

The yield on Treasury bonds leaped, and so did the stock market. The biggest stock gains came in companies that were the most liable to problems in an economic downturn. Homebuilders, banks and department stores were top performers. The yield on 10-year Treasuries hit 4.7 percent.

All that is forgotten now. Despite lots of hints from the Fed that it will not cut rates again, Wall Street is begging it to do so. Recession worries are high. The 10-year Treasury yield is now 3.84 percent.

Today, the Dow industrials and the S.& P. 500 fell to 10 percent below the peaks they set on Oct. 9.

In general, the best strategy has been to sell whatever went up after the Fed acted.

Here are some moves. The first covers the two day-period that the market was digesting the Fed action — the day it was announced and the day after. The second is since then, through today’s close.

S.& P. 500 +3.5%, -8.0%

S.& P. 500 homebuilders +5.2%, -39.0%

S.& P. 500 thrifts and mortgage +6.6%, -53.6%

S.& P. 500 department stores +7.3%, -25.5%

What this means is simple: The markets are no longer confident that the Fed will save us.

Did the Fed ever save us? Whatever action they take to “save the economy” has always entailed a counter-reaction. This time–so that consumers would keep buying after 9/11–it is artificially low interest rates held down over too long a period. Result: the biggest bubble since the South Sea and the biggest pyramid scheme (housing) since Giza.

What’s going on brings to mind when I cut my investment teeth in the bear market of the early 1970s. Was a sweet time for patient dividend oriented investors. 4-5% yields by top quality companies were common. Then as now I’m buying.

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Economics doesn't have to be complicated. It is the study of our lives — our jobs, our homes, our families and the little decisions we face every day. Here at Economix, journalists and economists analyze the news and use economics as a framework for thinking about the world. We welcome feedback, at economix@nytimes.com.